Laws and Regulations
1. Courts' Subordinate Role Confirmed in new People's Congress Supervision Law
Further to the 2005 controversy in which a Provincial High Court judge ruled that a local law was unconstitutional, the National People's Congress promulgated a law expressly stating that only the legislatures have the power to decide on the constitutionality of any laws. The new People's Congress Supervision Law, was promulgated on August 27, 2006, and will go into effect on January 1, 2007.
According to the law, the Standing Committee of local legislatures above the county level shall have the right to revoke any illegal or unreasonable resolutions, decisions and orders issued by any legislative body at an equal or lower level. Therefore, a legislature may revoke its own previously issued law, or the law of a lower government level. For example, a provincial People's Congress may revoke the regulations of a county People's Congress, but not a law made by the National People's Congress.
According to the law, judicial explanations issued by the Supreme Court and the Supreme Procuratorate shall be reported to the Standing Committee of the National People's Congress for record-keeping. Thus the new law indirectly reminds the courts that they do not have the power to rule that a law is unconstitutional, and that court decisions are subordinate to the legislature.
2. Partnership Enterprise Law Revised
The newly revised Law of the People's Republic of China on Partnership Enterprises was promulgated on August 27, and will be effective next year as of June 1, 2007. The main points are as follows:
- Partnerships are now opened up beyond partnerships of individuals. Now legal persons and other organizations can be partners.
- The revised law confirms that partnerships shall not pay enterprise income tax, and therefore are pass-through entities for tax purposes.
- Limited partnerships are detailed, including protections for minority and limited partners. Furthermore, a limited partner may make capital contributions in, goods, intellectual property, land use rights, or other proprietary rights. However, a partner's services cannot be counted towards its capital contribution. Limited partners are allowed to participate in certain actions, including the selection of the partnership's certified public accountant, reviewing the financial reports of the partnership, and acting as a guarantor to the partnership as allowed by other laws. A limited partner's interest in the partnership is assignable and may be pledged as a security interest in other transactions.
3. New M&A Regulations
On September 8, 2006 Chinese authorities issued the Regulations on Acquisition of Domestic Enterprises by Foreign Investors (the "New Regulation") to replace the interim rules issued in 2003, however, the new law is also intended to be temporary. While the New Regulation provides a more complete set of guidelines than its predecessor, it is nonetheless likely to cause U.S. investors additional complications when acquiring Chinese companies. This is because the New Regulation's potentially revolutionary impact is limited by its ambiguity, which hinders its impact and effectiveness despite its increased safeguards for national economic security, revised antitrust reviews, and regulations for stock-for-stock acquisitions and special-purpose entities.
One of the New Regulation's most considerable goals is the protection of national economic security. Under the new guidelines this means that, among other things, the acquisition of Chinese domestic companies that are deemed "important industries" that may affect the national economic security, or result in the transfer of "actual control" of companies having "famous Chinese brand names" or "well-established Chinese brand names" must be reported to the Ministry of Commerce (MOC). If the parties fail to file an application for approval of the transaction, the MOC has the power to nullify the transaction or order modifications to the transaction. However, this has been complicated by the fact that there is no definition or standard on how to determine what is an "important industry," a problem that is representative of the uncertainties that the broad discretion granted to the central government will create.
Furthermore, the New Regulation has provided guidelines on antitrust reviews of M&A transactions. These guidelines provide antitrust review requirements for certain large transactions or transactions involving large companies, making antitrust clearance from MOC or the State Administration of Industry and Commerce (SAIC) mandatory if, for instance, a company has more than RMB1.5 billion in Chinese sales during the current year, or if it controls 20% of the Chinese market. In the event that none of the specific conditions are met, a Chinese competitor, relevant agency, or industry association may petition the MOC or SAIC for an antitrust review at any time. In addition, certain M&A transactions among foreign companies occurring outside of China could also be subject to antitrust review in China if, for example, a foreign party owns more than RMB3 billion of assets in China, or if the foreign party owns shares directly or indirectly in 15 foreign invested enterprises.
Another feature of the New Regulation focuses on its treatment of stock-for-stock acquisitions. Before the New Regulation there was no legal regulation of these types of acquisitions of Chinese domestic companies by foreign investors, and MOC and the State Administration of Foreign Exchange (SAFE) usually refused to approve such transactions. However, under the New Regulation, stock-for-stock acquisitions are now permitted subject to certain restrictions.
These are but a few examples of some of the provisions outlined in the New Regulation, which provides a more complete set of guidelines on acquisition of Chinese domestic companies than the old rules.
4. Corporate Bankruptcy Law Adopted
China's top legislature, the Standing Committee of the National People's Congress, on August 27, 2006 adopted a corporate bankruptcy law, aiming to protect both creditors of bankrupt enterprises and the people who work in them. The law will come into effect on June 1, 2007.
The current bankruptcy rules, promulgated in 1986 on a test basis, is widely regarded as outdated as it fails to give sufficient protection to creditors and only touches on State-owned enterprises. The rules allow laid-off workers to be paid before creditors.
The main points of the new law are as follows: